That came after the government in May last year lifted a ban on share sales in the domestic market, prompting transactions and demand for brokerage services.

Turnover on the Shanghai and Shenzhen stock exchanges in the first two months of this year reached 9.42 trillion yuan, 5.73 times higher than for the same period last year. The monthly turnover volume in the first two months was 2.22 times higher than last year.

To tap growing business opportunities, brokerages are seeking funds through back-door listings, now a popular option because the prolonged industry slump had made brokers not profitable enough to undertake initial public offerings or bank borrowings.

In a typical back-door listing, a brokerage buys control of a listed 'shell' company with new shares or its own assets then sells the shell firm's assets to recoup its capital.

'One of the most effective ways to boost capital scale is getting listed which opens the door for many financing opportunities,' said Wang Yuedong, an analyst at China Jianyin Investment Securities.

Shanghai-based Haitong Securities, for example, is buying control of Shanghai Urban AgroBusiness for a listing status. After that, it plans to raise more than 10 billion yuan from a private share placement.

Mainland brokerages also need to bulk up following the China Securities and Regulatory Commission's imposition of new rules on capital reserves to cover potential risk exposure late last year.

The new rules require brokerages to have risk reserves equal to 2 per cent of total clients' funds. They also need to set aside at least five million yuan for each branch. When a brokerage buys a smaller rival, it must have risk reserves for additional branches and clients on top of the acquisition price.

Brokerages are also required to set aside 10 per cent of a share sale they underwrite, 5 per cent for a corporate bond sale and 2 per cent for a government debt sale, increasing funding needs for bigger deals.

For those that run asset management business, other reserves equal to 0.5 per cent to 2 per cent of funds they manage is needed. The risk reserve requirement for lending business is 10 per cent.

'If your net capital is not big enough, you will not be able to do certain businesses,' said Mr Wang, 'As long as you want to expand your business, the net capital is always a curb preventing your scale from getting too big.'

The industry boom since late last year has made brokerages profitable again and many of them are seeking to expand.

The 20 most profitable securities firms had a combined net profit of 18.8 billion yuan last year, versus a 2.4 billion yuan loss in 2005.

Citic Securities, the biggest in the mainland, said profit jumped six times to 2.4 billion yuan last year from 400 million yuan in 2005 while turnover surged to 5.8 billion yuan from 918 million yuan.

Last week, Hong Yuan Securities, the mainland's first listed brokerage, said it had received approval to underwrite initial public offerings and run asset management business.

Investors and analysts are bullish on the industry outlook, reflected by a 74 per cent gain in Hong Yuan's shares since the beginning of this year and a 43 per cent gain in Citic Securities shares.

Analysts said transactions would continue to be bolstered by the sale of former state-owned shares after the lock-up period ends. State firms agreed not to offload their interests for one year in A-share firms that completed a reform to make all shares tradable.

As the first batch of A-share firms completed the reform about a year ago, their state-owned shareholders could sell their shares now.

'The market value of tradable shares will continue to grow thanks to the continuous value-adding of former non-tradable shares into the market, as well as the coming new shares issuing in the market,' said a report by Guosen Securities.

Some investors have reaped handsome gains from back-door listings since snapping up the shares of the shell firms.

Shares of Shanghai Urban AgroBusiness, Haitong's shell company, have surged 280 per cent since the back-door listing plan was announced in October. Shares of in Yan Bian Road Construction, GF Securities' shell company, have gained 315 per cent since the beginning of last year.

'A shell company is usually operating at a loss but securities firms are having good results, so a back-door listing means sharp growth in value overnight,' said Xu Ming, an analyst at investment consultants Shanghai Shiji-Invest.

'It is largely speculative and investors tend to be very short-term.'

Shell companies 2006 profit (yuan) Net capital (year-end 2006, yuan)

GF Securities Yan Bian Road Construction 1.2 billion 2.90 billion

Sinolink (Guojin) Securities Chengdu Urban Construction Investment & Development 142 million n/a

Southwest Securities Chongqing Changjiang River Water Transport n/a n/a

Guoyuan Securities Beijing Huaer Company 558 million 1.87 billion

Changjiang Securities Shijiazhuang Refining-Chemical 449 million 1.87 billion

Northeast Securities Jinzhou Liulu Industrial 121 million 297 million

Haitong Securities Shanghai Urban AgroBusiness 650 million 2.35 billion

Capital Securities Chengdu QianFeng Electronics 129 million 674 million

Guohai Securities Guilin Jiqi Pharmaceutical 119 million 395 million

Xinshidai Securities Inner Mongolia Xishui Strong Year n/a 392 million

Sources: Wind Info, China Securities Journal and China Jianyin Investment Securities